New-build very large crude carrier price hits 1st rise since 2010

Prices of new builds can be a useful indicator of the tanker industry’s future fundamental outlook. When newbuild prices rise, they imply that companies are increasing orders for new ships. Shipping companies will often take this action only if they speculate future shipping rates (which can increase or stay the same from the current level) to be profitable enough to generate good returns from the new ships. Conversely, if future rates are expected to be unprofitable, then demand of new ships will fall, leading to lower ship prices.

In August, the new-build price for VLCCs (very large crude carriers) was negotiated at $92 million. This was an increase of $2 million from July, according to Simpson Spence & Young, the world’s largest independent shipbroking group. These VLCCs are used to haul crude oil primarily from Africa or the Arabian Gulf to major countries such as Japan, the United States, European countries, and China. This is the first increase we’ve seen since 2010, and it tracks a trend for a similar indicator collected by RS Platou, an international ship and offshore brokerage and investment bank (see Must-Know: Are we seeing the start of a crude turnaround?).

Long-term positive for tanker stocks

Prices for new ships have been falling since, as the world economy slowed, the United States continued to increase domestic crude oil production, and new deliveries added more than necessary fleets to existing supply. The recent rise shows managers as a whole may be expecting tighter supply and demand dynamics ahead. Since VLCCs can take up to five years to construct, we may see higher shipping rates in the long term.

This is long-term positive for the earnings and share prices of tanker companies like Frontline Ltd. (FRO), Nordic American Tankers Ltd. (NAT), Teekay Tankers Ltd. (TNK), and Ship Finance International Ltd. (SFL)—if they don’t go bankrupt in the meantime of course. The Guggenheim Shipping ETF (SEA), which invests in a diverse group of shipping companies, will also benefit.

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